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Wipro Limited (NYSE: WIT) is a global information technology (IT) services provider. The company makes software and hardware and provides outsourcing services to foreign corporations. Specifically, Wipro provides IT Solutions and Services, including systems Integration, Information Systems Outsourcing, IT Enabled Services, Package Implementation, Software Application development and maintenance, and Research and Development Services to corporations globally. Wipro also has a profitable presence in niche market segments of
Consumer Products, Lighting, Furniture, Eco Energy, Water treatment and Hydraulics. Wipro has over 72,000 employees and 647 clients.

Wipro has been a prime beneficiary of the outsourcing boom that has taken place in India throughout the 2000s. The company's revenue grew by 450% from 2002 to 2007. That said, this success has led to higher salaries (wages have been growing by more than 14% per year since 2005), putting pressure on the company's margins.[1] Moreover, Wipro's model is personnel intensive and its continued rapid growth will depend on the ability of the company to successfully attract large amounts of skilled labor - a scarce resource in a tight labor market.

Exchange rates also have important short-term and long-term implications for Wipro. About 57% of the company's revenue came from the US in Q1 2011. In the long-term, if the dollar continues to weaken against the rupee outsourcing will continue to become more expensive for American companies. For some of these companies, outsourcing represents only 50% of the cost savings that it did 3 years ago.

Company Overview

Business and Financial Metrics

Wipro reported revenues for the quarter of Rs. 72.36 billion ($1.56 billion), representing an increase of 16% over the same period last year. IT Services Revenue in dollar terms was $1,204 million, a sequential increase of 3.2% and year-over-year increase of 16.6%. Net Income was Rs. 13.19 billion ($284 million), representing an increase of 31% over the same
period last year. IT Services added 22 new clients in the quarter. Wipro added 4,854 employees in the current quarter.

Business Segments

IT Services (76.5% of Q1 2011 Revenue)

The IT Services segment provides IT and IT enabled services to customers. Its service offering includes software application development, application maintenance, research and development services for hardware and software design, data center outsourcing services and business process outsourcing services. In certain total outsourcing contracts of the IT Services segment, the Company delivers hardware, software products and other related deliverables.

IT Products (14.4% of Q1 2011 Revenue)

The IT Products segment sells a range of Wipro personal desktop computers, Wipro servers and Wipro notebooks. The Company is also a value added reseller of desktops, servers, notebooks, storage products, networking solutions and packaged software for leading international brands.

Vertical distribution of Wipro's services, as of the first quarter of 2010.[3]

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Geography

Wipro generates the vast majority of its revenue from the U.S. and Europe, 57% and 25% respectively.[3] This makes Wipro more vulnerable to shifts in the U.S. and European markets, as well as the global economy.

Geographic distribution of Wipro's services, as of the first quarter of 2010.[3]

Acquisitions

Trends and Forces

Maintaining growth difficult in competitive labor market

Wipro, like other firms in its line of business, has a personnel intensive model. To sustain a rapid revenue growth, it has to continue to hire large numbers of skilled employees. Wipro has effectively increased its workforce by about 60,000 since 2001. Ironically, India's economic rapid economic growth has increased competition for skilled employees and will make future growth both more difficult and more expensive.

Wage inflation puts pressure on margins

Demand for IT professionals has dramatically increased over the past several years. India has become a primary source for IT professionals and as a result, salary inflation has boomed. Over the last few years salaries for Indian IT professionals have had an average annual growth of 15%.[5] This large annual increase puts pressure on Wipro's margins and makes it more difficult to lower costs effectively.

Wipro gets the majority of its business from outside India. Most foreign companies are attracted to the low costs of outsourcing to Wipro and other Indian companies. As a result, Wipro feels the impact of foreign exchange fluctuations more than most companies. A strong rupee can be detrimental to Wipro’s operating margins. In the long term, wage inflation and the continued depreciation of the dollar, means that outsourcing is less affordable to the U.S. clients.

The chart below shows the rupee-U.S. dollar exchange rate. The number on the y-axis represents the number of rupees in one U.S. dollar. For example, on March 26, 2010, one U.S. dollar was equivalent to 45.13 rupees.

Competitors

Infosys Technologies (INFY): Infosys is a major competitor to Wipro. Infosys had an operating margin of 33.9% compared to Wipro's 22% margin in FY2010. [6]